UPDATE 1: 5:14 a.m. ET 5/19/2023: The plaintiffs in Peking University Founder Group Company Ltd.’s, or PUFG, Hong Kong keepwell litigation are discussing options to potentially appeal the
judgment handed down yesterday, May 18, by Justice Harris, in which he dismissed three of the four cases and declared the company in breach of its keepwell deeds with Founder Information (Hong Kong) Ltd., according to two sources familiar with the matter.
In his decision, Harris noted that Founder Information, the guarantor of $800 million keepwell bonds issued by Kunzhi Ltd., did not have a consolidated net worth of $1 at all material times from Dec. 31, 2019, indicating that the company had breached its obligations under the keepwell deed - which include ensuring that the guarantor has a consolidated total equity of at least $1 at all times - prior to Feb. 19, 2020, when a court-administered reorganization process under China’s Enterprise Bankruptcy Law, or EBL, began in Mainland China for PUFG.
Once the onshore reorganization started, Harris wrote, “there was no realistic likelihood of approvals being given to transfers out of the Mainland. This would simply have depleted assets available to the Administrators and the Company, which would otherwise be available to Mainland creditors or financing and implementing the reorganisation.”
Reorg’s legal analysis of the Harris judgment can be read
HERE. For further details of the background to the PUFG litigation, see Reorg’s
legal analysis and
in-court coverage.
The decision could have detrimental effects on the keepwell structure, potentially rendering them worthless, said the sources and a third market source. Following the decision, the keepwell bonds of Tsinghua Unigroup, whose own
keepwell litigation is awaiting a decision from Harris, traded down five points to 35, said two buysiders.
Justice Harris’s decision to bifurcate the enforceability of keepwells during a reorganization process from before it begins could potentially encourage debtors to go for onshore bankruptcy proceedings and cut off bondholders, one source pointed out. Another noted that anyone who places any reliance on the keepwell is going to find that they don’t work at precisely the moment you do want them to pay out - making them effectively worthless.
As a consequence, investors may favor a guarantee from the parent company for future offshore issues, and the Hong Kong judgment could mark an end of keepwells and equity interest purchase undertaking deeds, sources said, adding that raising funds for Chinese companies will likely become more difficult and expensive.
Howse Williams, which represents the plaintiffs in all four cases, did not respond to requests for comment.
As
reported, plaintiffs of PUFG had sought a declaration from the Hong Kong court rather than an enforceable money judgment. Liquidators of Founder Information can now use Harris’s decision as evidence in their effort to appeal the debt claims rejected by PUFG administrators to the Beijing No. 1 Intermediate People’s Court, which oversees the company’s reorganization. Questions remain, however, as to how much weight the mainland court will attach to a Hong Kong court decision.
–Anna Zhang
Original Story 4:41 a.m. UTC on May 18, 2023BREAKING: Hong Kong Court Declares PUFG in Breach of Keepwell Provided to Guarantor of $800M Defaulted Notes, Dismisses Cases Brought by Issuer, Guarantor of $900M Keepwell NotesJustice Harris of the Hong Kong Court has, in a decision dated today, May 18, recognized Peking University Founder Group Company Ltd.’s (PUFG) obligations under the keepwell deeds it provided to Founder Information (Hong Kong) Ltd., guarantor of the company’s $800 million defaulted USD bonds issued by Kunzhi Ltd. and declared that the company breached the keepwell deeds and caused Founder Information loss in the sum of the USD equivalent of CNY 1.154 billion.
Harris in the same decision dismissed three cases bought by Nuoxi Capital Ltd., HongKong JHC Co. Ltd., issuer and guarantor of $900 million defaulted notes, and Kunzhi Ltd., issuer of the $800 million notes.
–Anna Zhang